I'm looking to reduce the mortgage on my PPOR = $270000
I have no other investments or loans for that matter.
I've applied to ANZ for a line of credit @ 7.22% and should have about $88000 to use, maybe more they are still doing the evaluation.

I was thinking of putting 40000 in each of their funds for between 4 and 5 years or longer. Any opinions on this fund, seems to have done well over the last 5 years even through the GFC.

Questions:
1. Is the interest on the LOC tax deductible, I mean I don't need to go with a margin loan?
2. Tax to look out for? Capital gains, which is at my top tax rate 38%?
3. Since my wife earns in the 15% tax bracket, can I put the earnings to her salary and pay the lower tax? The investment will be in both names.

The fund pays every 6 months and I was going to pull some out at the end of the year to pay things like capital gains and other charges I haven't seen. Good idea?

3. Since my wife earns in the 15% tax bracket, can I put the earnings to her salary and pay the lower tax? The investment will be in both names.

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The income/capital gain AND tax deductions go to the name as the investment. So if it is your wife's name, then initially when it is negatively geared you won't get as much tax benefit, but if/when it becomes positively geared you will pay less tax.

The fund pays every 6 months and I was going to pull some out at the end of the year to pay things like capital gains and other charges I haven't seen. Good idea?

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Not sure what other charges there will be - all the management fees from a managed fund are taken out of the unit price of the fund. You should receive a distribution containing income and some distributed capital gains which you may need to pay tax on - but if you put that money aside from the distribution you would be covered.

The only expense will be the interest on the LOC.

Some things to consider before you start:

What is your risk management strategy? What drop in market value will you take before selling out? Or will you hold regardless of price?
Forgetting tax benefits, how confident are you that this investment will return more than the interest rate on the LOC?

The income/capital gain AND tax deductions go to the name as the investment. So if it is your wife's name, then initially when it is negatively geared you won't get as much tax benefit, but if/when it becomes positively geared you will pay less tax.

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It will be in both names? Oh well tax agent will work that one out. I'm still prepared for the 38%, but thought that I might get away with my wife's tax rate.

In looking to invest for about 5 to 10 years depending on the performance. I will have a buffer in the LOC and my Mortgage to ensure against drops in the market.

And for further risk, I'm also going to get a Margin loan to top up the investment... again with a buffer. Been looking at a few ML's which only allow LVR of 40%... is this a bad sign when most other funds are about 75%?

Forgetting tax benefits, how confident are you that this investment will return more than the interest rate on the LOC?

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As confident as a newby can be. Looking at past growth of an average of 21% over the last 5 years should cover me? Not that that is guarenteed, but reading the PDS the manager has a 20% incentive, which should motivate him. I'm open for other options...

Capital gains is taxed on profit made on sales of shares/funds. If you have an active fund, the manager may churn (buy & sell) resulting in capital gains tax being incurred. Distributions are income, so they are added to your wage.

"As confident as a newby can be. Looking at past growth of an average of 21% over the last 5 years should cover me? Not that that is guarenteed, but reading the PDS the manager has a 20% incentive, which should motivate him. I'm open for other options... "

Just because a fund returned 21% in the past doesn't mean anything. Also, that 20% incentive is a 20% fee that you Won't be getting. Research index funds/ETFs before committing to an actively managed fund.

"
Research index funds/ETFs before committing to an actively managed fund.
Johny.

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I will do, I've got a number of weeks before the funds will be available so that will give me plenty of time to keep researching. I was thinking of one of the Zurich equity income funds as well. Perhaps:

20% to Zurich
50% to Wilson
20% to perhaps a colonial fund that into international shares
10% cash buffer

So does that mean I pay capital gains twice? The fund reinvests the gains which I take is income and capital growth every 6 months - Taxed? and then if I sell some units -Taxed?

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I would say you pay two different types of capital gains tax.

1. Say the fund manager sells a share that they have made a gain on. This capital gain (after being offset to capital losses on other shares) has to be distributed to unit holders at the end of the financial year. As it is distributed, the unit price of the managed fund drops to reflect this.

2. CGT on the difference between the purchase and sale price of your managed fund units.

So the "distribution" of a managed fund that invests in shares will consist of "income" (which is generally made up from dividends from the underlying shares) and distributed capital gains (from 1 above).

Note that the amount of distributed capital gains is affected by the amount of "churn" in that fund. So an index fund (which doesn't buy and sell the underlying shares regularly) will have very little distributed capital gain, where as an actively traded fund can have a lot of distributed capital gain.

Note this is my understanding from investing in a variety of managed funds over the years - I'm not an accountant so you might want to confirm with yours.

If you are putting in small regular monthly payments, it is better to use an index fund. An ETF works best with larger values due to brokerage fees. Will you be contributing regularly?

Johny.

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Hey Johny, No, I won't be contributing regularly. The plan is to review every 6 months and perhaps each year, sell what's needed for the interest, capital gains and buffer, but put that into the mortgage and then increase the LOC. So yeh, maybe ETF will be better.

There are 34 ETFs on the ASX, with more to come. The US has some 800. They have some strange ones; ETN (exchange traded notes) ETC (exchange traded commodities) Double geared ETFs and Inverse ETFs and even derivitive Funds.

If you choose the ETF path, research Asset Allocation before buying. By choosing the right combination of ETF asset classes you lower risk and get higher returns.

If I had to start from scratch, I would build it from current ETFs available.

Play around with google,investapedia and InvestEd and let us know what your plans are.

Johny.

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Thanks for sharing Johny. Food for thought the way you've diversified, which I know is a good thing.

I'll put together a plan the way you have and let you guys know in the next few weeks while I'm waiting for the funds.

Do you margin loan?

And If I were to get a margin loan, do the banks look at my total portfolio to make up one account. Or do they split it between all funds and I end up with say 10 MLs? If that makes sense. The ANZ guy I'm going through for the LOC didn't know about ML and I haven't had time during the day to ring the bank.

I got badly burnt by debt a few years ago, so I don't borrow on margin currently.

You would have to check with your lender as to how they evaluate your loan.

The CBA owns CFS. There is a CFS margin lending arm which will back funds bought from CFS. As well as having there own funds, they have badged other investment companies, like Ausbil, Deutche bank etc.

So this will be the brake up:
Large Cap, Mid Cap, Small Cap: 1 and 2 at 61%
Foreign: 3 at 18% (had to go 18 due to the buy in price)
Bonds: 4 at 6%
Municipals: 5% but might change a little depending on the funds I can find.

Any ideas on a Municipals Fund?

It's a little off the asset allocation calculator, but still looks OK to me.

The Wilson priority growth fund invests in mid and small cap funds. As small companies have a capacity for more growth, they can beat large cap. They also fall quicker in a crash.
Perhaps? Use this fund as your small caps.
Johny.

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Yeh I was combining both of the funds as all of them cause the other does large and mid. So I've got Large, Mid x 2, and small between the two funds. I could take it down to about 29% each if need be and put the rest elsewhere.

Vanguard has some Australian fixed interest, then there's CFS index Australian bond and Deutche bonds amongst others.

The reason you choose bonds/FI (I have 40%) is that they perform differently to shares. When stocks drop bonds don't. Every year you rebalance. That is reset, to your original percentages. If the % of bonds rises you buy shares with the difference and if the % shares rises you buy bonds with the difference. Effectively buying low and selling high. Research rebalancing.